Alcoa 2013 Annual Report Download - page 151

The following table summarizes the total compensation expense recognized for all stock options and stock awards
(there was no stock-based compensation expense capitalized in 2013, 2012, or 2011):
2013 2012 2011
Compensation expense recognized:
Stock option grants $21 $27 $34
Stock award grants 50 40 49
Total compensation expense before income taxes 71 67 83
Benefit for income taxes 23 21 27
Total compensation expense, net of income taxes $48 $46 $56
As part of Alcoa’s stock-based compensation plan design, individuals who are retirement-eligible have a six-month
requisite service period in the year of grant. As a result, a larger portion of expense will be recognized in the first half
of each year for these retirement-eligible employees. Of the total compensation expense before income taxes included
in the table above, $14, $13, and $18 in 2013, 2012, and 2011, respectively, pertains to the acceleration of expense
related to retirement-eligible employees.
The fair value of new options was estimated on the date of grant using a lattice-pricing model with the following
assumptions:
2013 2012 2011
Weighted average fair value per option $ 2.24 $ 3.11 $ 4.96
Average risk-free interest rate 0.10-1.89% 0.06-1.89% 0.19-3.44%
Dividend yield 1.3% 0.9% 0.9%
Volatility 28-40% 39-45% 36-43%
Annual forfeiture rate 7% 5% 5%
Exercise behavior 45% 45% 45%
Life (years) 6.0 5.8 5.8
The range of average risk-free interest rates was based on a yield curve of interest rates at the time of the grant based
on the contractual life of the option. The dividend yield was based on a one-year average. Volatility was based on
historical and implied volatilities over the term of the option. Alcoa utilized historical option forfeiture data to estimate
annual pre- and post-vesting forfeitures. Exercise behavior was based on a weighted average exercise ratio (exercise
patterns for grants issued over the number of years in the contractual option term) of an option’s intrinsic value
resulting from historical employee exercise behavior. Based upon the other assumptions used in the determination of
the fair value, the life of an option was an output of the lattice-pricing model.
The activity for stock options was as follows (options in millions):
Number of
options
Weighted
average
exercise price
Outstanding, January 1, 2013 45.0 $12.58
Granted 8.0 8.88
Exercised (1.6) 8.32
Expired or forfeited (6.1) 22.13
Outstanding, December 31, 2013 45.3 10.78
The total intrinsic value of options exercised during 2013, 2012, and 2011 was $2, $2, and $34, respectively. In 2013,
2012, and 2011, the cash received from option exercises was $13, $12, and $37 and the total tax benefit realized from
these exercises was $1, $1, and $11, respectively.
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